SOHO China eyes land purchases, Shanghai

By Langi Chiang and Alan Wheatley

BEIJING (Reuters) - Commercial property developer SOHO China Ltd (0410.HK) has built up a war chest of $1.9 billion to replenish its land bank and start new projects in Shanghai and Beijing in the second half of the year, its chairman said.

It will be the first time that SOHO China has ventured beyond the capital, where its modern, eye-catching developments are dotted around the city center.

"We have entered some in-depth talks (in Shanghai)," Chairman Pan Shiyi told the Reuters Global Real Estate Summit on Monday. "They are mainly about acquiring land and half-built or completed buildings from others."

Despite the strong temptation to branch into other Chinese cities, Pan said SOHO China would stick for now to Beijing and Shanghai, which together account for 30 percent to 40 percent of China's retail and office market.

SOHO China is expanding to take advantage of property valuations that have fallen to attractive levels after a deep downturn since late 2007. The market has begun to show some signs of picking up in recent months.

But Pan said the recovery, in the property sector as well as in the overall economy, was mainly driven by too much liquidity, and he warned that a record pace of bank lending so far this year could fuel inflation.

"Inflation has been built into our economy like a virus," Pan said. "It's still in a latent phase for now, but it will certainly break out when the economy recovers."

He said another asset bubble was also forming, demonstrated by rising land transactions and higher prices.

In Beijing, 23 lots of land were sold in May, fetching a total of 6.2 billion yuan, almost five times more than in April. Guangzhou R&F Properties (2777.HK) paid 1.02 billion yuan last month for a lot with gross floor space of 72,500 square metres in southeastern Beijing.

Morgan Stanley last week upgraded SOHO China to overweight, while maintaining its price target at HK$6.10. "Our previous concerns over the company's long-term growth prospects and its lack of geographic diversification have been assuaged as we see the company's expansion plan gradually emerge," Morgan said.

Shares of SOHO China rose 1.52 percent to HK$4.68 during Monday's morning session.

EYE FOR A BARGAIN

SOHO China would look at participating in public land auctions, but Pan said it would be quicker and cheaper to acquire distressed property assets, particularly in Shanghai.

Doing so would enable SOHO China to increase its leverage.

Banks are barred from lending money to buy land at auction from the government. But a rule introduced last December allows them to finance half the cost of land acquired from other developers.